This paper is a first attempt at empirically analyzing whether post-crisis regulatory
reforms developed by global-standard-setting bodies have created appropriate incentives to
centrally clear Over-The-Counter (OTC) derivative contracts. We analyze three main drivers
of the decision to clear: 1) the credit risk of the counterparty; 2) the characteristics of the
contract; 3) the clearing member’s net exposure vis-a-vis the Central Counterparty Clearing
House (CCP). We use confidential European trade repository data on single-name sovereign
Credit Derivative Swap (CDS) transactions, and show that both the seller and the buyer
manage counterparty’s exposures and capital costs, strategically choosing to clear when
the counterparty is riskier. The riskiness of the underlying reference entity also enters the
decision to clear as it affects both Counterparty Credit Risk (CCR) capital charges for OTC
contracts and CCP margins for cleared contracts. We empirically investigate the trade-off
between the two and find that the likelihood to clear is higher if the reference entity becomes
more risky, but only for the riskier sovereign CDS in the sample, while for safer sovereign
CDS the opposite is true. Our findings suggest that CCP margin savings considerations may
be the main force behind the decision to clear for safer instruments while CCR exposures
and capital charges may prevail for riskier ones. Lastly, we find some evidence that when
the transaction helps reducing counterparty’s overall outstanding positions (and therefore
margins) vis-a-vis the CCP, the likelihood to clear is higher. This result holds true as long
as considerations such as CCR counterparty risk and wrong-way risk do not prevail.